8% service tax: Car maintenance cost likely to go up in 2024, continuity of free service packages in doubt

Yesterday’s tabling of Budget 2024 proposed for the current service tax rate of 6 percent to be increased to 8 percent. The scope of the new service tax will also be expanded to include logistics, meaning that the cost to transport finished cars and automotive parts will be higher next year.

Details on effective implementation date, or guidelines for car workshops are still lacking so we will have to wait for a separate announcement from Customs. The use of the term service tax is also causing a bit of a confusion to the general public, as most Malaysians refer to sales and services tax as a single, unified SST item.

Based on existing SST guidelines by Customs, it is quite clear that many workshops will have to increase their prices in 2024 to make up for the higher tax. Surely, we can’t expect the government to remove what’s already listed as a taxable service.

The current SST (6 percent rate) guidelines by Customs says –

Effective 1st September 2018, any person who:

• Operates a motor vehicle service centre
• Operates a motor vehicle repair centre
• Provides motor vehicle service services
• Provides motor vehicle repair services

is subject to service tax under Item 5, column (1), Group I, First Schedule, Service Tax Regulations 2018. However, only workshops with turnover of more than RM 500,000 are taxable.

Taxable services include (but not limited to):

• Repair and engine tuning service
• Change, adjust and install spare parts service
• Balancing and alignment services
• Body repair, knocking and welding services
• Provision of Pre-Delivery Inspection (PDI) services by a motor vehicle
• The cementing and repainting services
• Services on the trailer and tanker
• Reimbursement on prescribed service by third party (i.e. when workshop A outsources job to workshop B)

A workshop that is currently charging, say for example, RM 120 for labour to complete an oil change has to add RM 7.41 in service tax. Under the new 8 percent rate, the figure is now RM 9.60. It’s a small increase but remember that we haven’t factor in the increased transportation cost for automotive parts.

The current SST guidelines exempt car wash, towing, and auto detailing services (polishing and waxing) from service tax, but it is still unclear if this will remain in the revised 2024 SST guidelines.

The sales tax for spare parts remains at 6 percent. With two different rates - 6 percent for parts and 8 percent for labour (services) - workshop owners will also need to do some adjustments to their accounting software.

For car companies that currently offer 3-year or 5-year free service to their customers, the first task on Monday morning is to crunch some numbers to determine if they can still afford to offer the same privileges to their customers.

For some companies like Bermaz Auto, which offers a truly all inclusive 5-year free service that includes parts, labour and lubricants for Mazda (except BT-50) and Peugeot models, the cost impact will add up quite significantly.

Others whose ‘free service’ offers are limited only to labour, may see less impact to their bottom line.

None of these ‘free’ services are ever free. Everything has already been costed into the car’s selling price, so the question is whether under the new 8 percent rate, can they still maintain the current selling price of their cars?

Since Budget 2024 was announced on late Friday, many car companies still don’t have an answer regarding the impact on prices of their car parts and service packages, but it is safe to say that car maintenance cost will creep up further next year, and this is developing within the context of global inflationary pressures and our weak Ringgit pushing up prices of consumable parts like tyres, wipers, and 12V batteries.